Buy American...And Chinese

HONG KONGWith China and U.S. stimulus spending in high gear, equal opportunity between U.S. and Chinese companies to bid for lucrative government contracts in either country remains a distant hope.

This is China's second year of ongoing talks to join the World Trade Organization's government procurement agreement (GPA), a trade pact that prevents member countries from discriminating against each other's goods and services in government projects. Amid public spending splurges around the world during the economic slump, there is a lot at stake. If it completes its GPA entry sooner rather than later, China would have a chance to get around future versions of the "buy American" requirement in the $787 billion U.S. stimulus package, lawyers and scholars say.

But China is in no hurry to join. Its own laws favor--in fact, require--government purchases of domestic goods and Beijing has been eager to funnel its $586 billion stimulus package to local producers too.

It took China seven years after joining the WTO in 2001 to make good on its commitment, extracted at the time by the U.S. and E.U., to apply to the GPA. It may take even longer for China to conclude arduous negotiations with GPA members, which include major developed countries, and finally join, according to Wang Ping, a specialist in WTO law and Chinese government procurement at Englands University of Nottingham. The West is eager to see China join the GPA, which exempts some areas like defense. Joining would also expose China to WTO suits and remedial duties levied by other countries, on GPA compliance issues.

China is dragging its feet for a variety of reasons. Beijing would be loath to give up its ability to wield government purchasing as a policy tool to promote strategic sectors, like technology or energy. The state-owned industrial sector, a powerful lobbying voice to the central government, is also just fine with gobbling up a big chunk of China's stimulus projects. Local governments dont want more transparency or regulation in how they dole out public financing, particularly as officials often get kickbacks from funneling projects to favored suppliers. Chinas ambitious telecom operators and oil producers have been focused on public infrastructure projects in developing regions like Africa, not the U.S. or European markets, Wang Ping noted.

The negotiation for accession to the GPA might take a long time. You have governments at various levels who are against strengthened transparency and domestic enterprises who are against foreign competition, said Wang Jiangyu, a trade specialist at the Chinese University of Hong Kong. China also wants to join as a developing country member which is not acceptable to other GPA members.

China has put up a meager offering so far: it is only willing to open up contracts with the central government, leaving out provincial and local governments which are financing over half of the countrys half-trillion-dollar stimulus package. State-owned enterprises, which lead the way in lightning-fast construction of railways, airports and roads, are excluded. Chinas entire utilities sector, from water to power, is off limits.

Still, there could be more momentum in the future. If any Chinese enterprises want to be a leading global player, they can't afford to ignore the Western market for government contracts, said Wang Ping, who has spoken with Chinese enterprises frustrated with being shut out of bidding for U.S. and European government contracts.

The Obama administration's stimulus package requires contracts for domestically-produced iron, steel and manufactured goods. But it also specifies that this 'buy American' provision be "applied in a manner consistent with U.S. obligations under international agreements." On April 24, the U.S. notified that the buy American requirement would not apply to goods made by countries that are parties to the GPA and other U.S. treaties, noted Stuart Harbison, a former senior adviser in the WTO Secretariat and Hong Kong's WTO representative from 1994 to 2002. That means the requirement would exempt China if China were a GPA member.

Right now, the GPA itself is ill-prepared to absorb China. None of the GPA member countries has a vast state-owned sector like Chinas, and the trade pact would need a new way to account for procurement by state-owned enterprises, Wang Ping added.

For now, foreign suppliers have been finding loopholes in Chinas government procurement market. Chinese law allows government purchasing from foreign suppliers only under "exceptional" circumstances, that is, if the goods aren't available domestically at commercially reasonable prices, or will be used outside China. But the WTO noted last year local governments "routinely" buy imported goods, as their compliance is difficult to monitor by Beijing and measuring the domestic content of goods can be open to interpretation.

Thus far, Beijing is unhappy that the country's $586 billion stimulus package hasnt bought more Chinese goods and services. The State Council, China's cabinet, reiterated on April 10 that all levels of government must give preference to domestic goods. New regulations strengthening such may be slated for this year, according to the Economic Observer.